Retail

Will Staples Close 200 Stores?

Douglas A. McIntyre

Published: May 12, 2016 9:28 am

Last Updated: January 13, 2020 9:30 am

Now that the Staples Inc. (NASDAQ: SPLS) merger with Office Depot Inc. (NASDAQ: ODP) has been called off, the huge office supply company is left with 1,302 stores in the United States and the traffic to Staples.com. Management is left with an operation the revenue of which peaked in fiscal year 2012 and is shrinking. Staples will need to close a large number of stores, likely close to 200, based on its sales trends. Its current model is too inefficient.

According to Morningstar, Staples revenue was $25 billion in 2012 and $21 billion last year. Margins last year were razor thin. Net income was only $397 million. These numbers illustrate the reason for the Office Depot combination as a way to cut costs, and stores in the process, to create bottom-line efficiency.

The market has weighed in on Staples’ lack of promise. Shares are off 49% in the past year to $8.46, and they plunged nearly 20% the day the merger was called off.

Based on the drop in Staples revenue and the certainty that customers have migrated purchases to Staples.com, management will have to rapidly drop expenses. It already has reported:

The company generated approximately $750 million of annualized pre-tax cost savings from 2013-2015 by evolving business processes, increasing productivity, and developing more efficient ways to serve customers. Staples is initiating a new multi-year cost savings plan which is expected to generate approximately $300 million of annualized pre-tax cost savings by the end of 2018. The company will primarily focus on reducing product costs, optimizing promotions, increasing the mix of Staples Brand products, and reducing operating expenses.

It is hard to estimate yield per store. However, it is not difficult to understand that any struggling retailer with low margins has locations that lose money. Add to that the efficiency of the e-commerce market. Staples closed 242 locations in 2014 and 2015 combined. The math of falling revenue continues to work against it, and, based on revenue trends, the trend is not over. Close 200 stores? The math is compelling.